Trading can take various forms, such as the domestic buying and selling of products or services, imports and exports, and the new trend nowadays that is speculating the markets, such as forex, commodities, indices, shares and much more.
What defines the trading activity are the laws of demand and supply in microeconomics, and macroeconomics.
Trading: The laws of demand and supply
Let’s therefore, take one law at a time to understand the essence.
The law of demand states that when the price of a product or service drops, the quantity demanded increases, as the buyers have the spending power to purchase more, and vice versa.
The law of supply states that when the price of a product or service drops, the quantity supplied decreases, as the sellers think twice whether to sell at lower profit or cost and vice versa.
What differentiates the two laws are quantity and price. In the law of supply, the two are directly linked, whereas in the law of demand the two are adversely correlated.
There are different factors that influence the level of demand for a product or service, such as:
- Consumers have different preferences and tastes
- People have different incomes and their ability to purchase varies
- Change in consumers’ income influences purchasing style
- Consumers pay attention to substitute products too
- The number of consumers for each market is different
- The expectations that the consumers have for future prices
Similarly, there are factors that influence the frequency of the provision of products or services, such as:
- The price of a product is vital as to the profit of the suppliers
- The cost of production where low costs would mean more products to be made at lower prices for higher profit
- Natural conditions impact production when it comes to products
- Technological advancements influence the production, especially on products
- Transportation costs influence a supplier’s net profit margin
- The prices of competitors have an indirect impact on the suppliers’ profit margins
Macroeconomics studies a nation’s economy on a domestic or a global scale.
The macroeconomics agenda involves studying indicators such as unemployment rates, inflation, gross domestic product (GDP), investment, savings, international trade and finance, national income, consumption, and much more.
Trading: The FX market
The forex traders make their decisions either on technical analysis, reading the charts, or macroeconomics, reading the daily and weekly events.